Properly Analyzing Potential Property Purchases

When I was going through a divorce I had no idea what to do. I was negotiating blind. I did not know what would be an equitable split. I had nowhere to look to find the answers either. The divorce attorney was not much help because they were more interested in keeping the chaos going rather than moving toward clarity. There were many variables including alimony, child support, the marital house, insurance coverage for the children, Custody rights, retirement benefits, the value on her business and mine, saving account, Christmas ornaments and the photos/ videos tapes of the family.

The way I was able to get a handle on the divorce was to set my priorities. What was most important to me? This has been covered before at the beginning of the year in the blog of setting goals. So I won’t go into it here. The next biggest thing was the evaluation of the assets. One thing that I could not put a value on was the relationship I have with my daughters.

Sounds like the same thing in real estate where there are many variables and there are a few things you cannot put a price on. So let’s make it simple to understand. Follow the money! That’s the difference between divorce and real estate. Divorce is more than the money. Real estate is about money and returns and providing service with value. If you disagree, then call me. I need to talk to you!

When we look at properties we must understand that the value is determined by the use of the property. (Home owner Vs tenant). The first thing we have to decide is who is going to pay us money! (Notice I said who is going to pay us!) We can get paid by whole selling, buy fix and sell, buy and holds (rentals/ Lease options). Most importantly how much are they willing to pay us! (Whoo hooo). So if we are going to live off our investments the minute we buy them they better produce that day!!! Each one of the exit strategies I just discussed have costs associated with them. (Taxes, insurance, monthly payments, Home owner associations, maintenance, utilities, trash, lawn, overhead, contractors. etc.)

The property has expenses associated with it and we need to determine what those are by asking the owner or realtor what are the costs and see what the owner was getting in revenue. (If it was income generating property). We need to determine what the expenses are and how much money they consume. I will give you reputable sites to go to get this information later. I saw a property that had a fabulous 25% rate of return. I got excited! I asked the hard question from above about the expenses and found out the owner paid for everything including furniture and washer dryer included. After the expenses, the rate of return dropped to a whopping 8.5% (not for me).

Now for the fun part… the math.

The math is easy… dollars in and dollars out. What is the top price a property has sold for in the area in like kind shape and size? What is the value of the property? (Remember you cannot put a price on a million dollar view or lake front or… can you?) How long did the properties sit on the market (to rent or sell)?

The places we get this information are as follows:

Zillow.com (beware you must be trained to accurately get the information. It is rarely the Zestimate.)

To find out what questions you need to be asking, ask another investor what you should ask.

Typical questions:

What will this dump (place) rent for?

How long has it been vacant?

Has anyone ever died in here?

Has the sewer ever backed up in the house? (That is a great story)

Sewer or septic. Does the septic work? (That is a great story)

Have you ever had a flood?

When was the HVAC replaced? If ever?

How many people are on title? (That is a great story)

What is this crack from?

When was the electric panel updated? If ever?

Does the dog bite? (That is a great story now but it wasn’t then)

Does the dog come with the house?

Does the furniture / appliance come with the house?

How long have you owned the property? (I hate that question)

Why are you selling? (This is the best negotiating question)

When was the last time the property had a termite inspection?

Can you get cell phone service here?

Is the electrical working properly?

What is this hole in the yard from?

What do you think the cost of repairs will be?

Have you had a contractor come out and give you a price?

The only stupid question in real estate is the one not asked! I do have a rule in due diligence if the owner talks to much about the future potential of the property, run away! (Or ask why they don’t just hang onto it and do what they’re telling me to do?)

Until next time, I look forward to meeting you and helping you on your way to becoming a successful real estate investor!